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Take a Look Inside My 'Billion-Dollar' Portfolio

Is there a perfect size for a stock?

Perhaps not. Size doesn't matter - at least, not as much as profitability, growth and valuation. And yet, there is a size to which I am particularly partial.

It's right around $1 billion. To me, that is the dividing line between small-capitalization stocks and mid-capitalization ones. A company near $1 billon in market value is big enough to be seasoned, yet small enough so that it doesn't yet have much of a following on Wall Street.


Each year I bring you my Billion-Dollar Portfolio, a collection of 10 stocks, each with a market value of roughly $1 billion. I started this portfolio in 2001, and have compiled it every year since, except in 2007 to 2010. So, today's is the 15th one.

The average 12-month gain on the Billion-Dollar Portfolio has been 15.1%. That compares to 11.8% for the Standard & Poor's 500 Index over the same 14 periods.

Eleven of my previous 14 Billion-Dollar Portfolios have been profitable, and 10 have beaten the S&P 500.

Bear in mind that my column recommendations are theoretical and don't reflect actual trades, trading costs or taxes. Their results shouldn't be confused with the performance of portfolios I manage for clients. And past performance doesn't predict future results.

Here now are the members of my 15th Billion-Dollar Portfolio.

Astronics

Astronics Corp. (NASDAQ:ATRO), based in East Aurora, New York, makes parts and test equipment for the aerospace-and-defense industry. Its return on equity the past four quarters has been very strong, at 27%. And the stock price is only nine times earnings. However, analysts expect earnings to fall soon.

Azz

The most expensive stock on this year's list, at 18 times earnings, is Azz Inc. (NYSE:AZZ), a Fort Worth, Texas company that makes electrical equipment and steel galvanizing equipment, among other things. Azz has shown a profit in each of the past 15 years, even in recession-cursed 2008.

Continental Building

Continental Building Products Inc. (NYSE:CBPX) of Herndon, Virginia, makes gypsum wallboard and other products used by builders. If you expect, as I do, an increase in homebuilding in the next two years, you may like its prospects.

Greenbrier

The number-two maker of railroad cars in the U.S., Greenbrier Companies Inc. (NYSE:GBX) serves a mature industry. But it has turned a profit in 13 of the past 15 years, and its stock seems cheap to me at less than book value (corporate net worth per share).

Kelly and Kforce

Next come a pair of staffing companies, mostly providing temporary workers. The fragility of the economic recovery in the past 10 years and the high cost of high insurance have both given a boost to temp companies.

Kelly Services Inc. (NASDAQ:KELYA) is one of the largest. Kforce Inc. (NASDAQ:KFRC) is smaller and specializes in technology employees.

Both are inexpensive stocks. Kelly sells for about eight times earnings, Kelly about seven.

Liberty Oilfield

The agony has to come to an end sometime for energy stocks. As a speculation, I like Liberty Oilfield Services Inc. (NYSE:LBRT), a Denver-based company that has been around for less than a decade. Despite hard times in the oil patch, it has held its debt to less than 50% of stockholders' equity.

Livent

Livent Corp. (NYSE:LTHM), with headquarters in Philadelphia, makes lithium compounds used in batteries, pharmaceuticals, and lightweight airline parts. Ten Wall Street analysts follow it, eight of whom rate it a "buy." Usually, that would go with high valuations, but Livent shares fetch only nine times earnings.

National Western

Debt-free is National Western Life Group Inc. (NASDAQ:NWLI) of Austin, Texas, an insurer dominated by the Moody family. The company has been consistently but modestly profitable. The stock has performed badly the past two years, and sells for only seven times earnings.

Stewart Information

A stock I've owned in the past is Stewart Information Services (NYSE:STC), which sells title insurance. People have been moving less often since the Great Recession, and Stewart's so-so results show it. Then again, you can own the stock for 11 times earnings in a market averaging 22 times.

Last year

Last year I ran into a statistical anomaly such as I've never encountered before in two decades as a columnist. I had a huge "paper" gain on Mikino Milling Machine Co. Ltd. (MKMLF) of Japan. But I now realize the stock is so infrequently traded that readers probably couldn't have gotten such a gain.

After some agonizing, I decided to credit myself with half the gain on Mikino. With that, my return for 2018-19 was 13.6%, compared to 10.8% for the index.

Disclosure: I own Greenbrier for several clients and personally.

John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.

This article first appeared on GuruFocus.